WhatsApp's jaw-dropping $19 billion price tag took the world by surprise. But
Facebook might have actually gotten WhatsApp for cheap.
We're serious. Hear us out.
What is WhatsApp? WhatsApp
is a mobile messaging service that functions as a kind of a social network.
WhatsApp users can send messages to one or many recipients at the same time,
and they can even share their locations.
In many ways, WhatsApp's users are just the kind of customers
Facebook is looking for. They are extremely active, sending more than 600
million photos a day -- more photos than Facebook users upload. A whopping 70%
of WhatsApp users are active every day. By way of comparison, 62% of Facebook
users are active daily.
People around the world send 19 billion WhatsApp messages per
day, including 200 million voice messages and 100 million videos.
Crucially, WhatsApp has a strong presence internationally,
particularly in Europe, India and Latin America. Those are regions where
Facebook is trying to grow its base of users. WhatsApp and other mobile messaging
services also are widely used by teens and tweens, a group that has notoriously
been ditching Facebook for rival services, including text message services and Snapchat.
"Facebook users were complaining dearly about the lack of
one-on-one personalized socializing and sharing, which WhatsApp clearly has
been successful with," said Vidya Nath, research director at Frost &
Sullivan.
How WhatsApp makes money: WhatsApp is also growing at a blinding
speed, adding 1 million new users per day. At that rate, WhatsApp should hit 1
billion users sometime next year. With its $1 annual subscription fee, 1
billion users would translate into significant revenue for Facebook.
"Large scale networks like WhatsApp are rare and provide
significant monetization opportunity, justifying their valuation over
time," said Robert Peck, analyst at SunTrust Robinson Humphrey.
The messaging service, founded in 2009, has been so successful
because it understood from the start the importance of embracing mobile
technology. That's something Facebook struggled with, notably going public
without any revenue from mobile devices. Facebook now gets more than half of
its revenue from advertising on smartphones and tablets, but it still is
looking to expand its mobile reach.
"WhatsApp took chatting to another level, and it further
strengthened the phone as a central point of a consumer's universe," Nath
noted.
As a result WhatsApp managed to attract far more users in its
first four years than its competition was able to over the same time period.
Growing faster than other social networks: Four years in, Facebook had just 145
million users. Google's Gmail had 123
million. Twittermhad
54 million. And Skype -- now owned by Microsoft had 52 million users,
according to Heather Bellini, software analyst at Goldman Sachs.
Although WhatsApp is more limited in its scope and capabilities
to Facebook and Twitter, mobile messaging services are becoming competitors to
traditional social networks.
In many ways, Facebook's purchase of WhatsApp mirrors its 2012 Instagram
acquisition.
The $1 billion valuation scared some investors at the time, but
as young social network users gravitated towards photo-sharing services,
Facebook wanted to scoop up what could have eventually become a big rival.
WhatsApp may be "cheaper" than most
rivals: Facebook
paid just $30 per Instagram user at the time (the service had 33 million users
when Facebook bought it, compared to 150 million today). Facebook is spending
$42 per WhatsApp user.
But given WhatsApp's enormous user base, its purchase price
might be a bargain compared some of its competitors. LinkedIn's share price values that
professional social network at $153 per user. Twitter trades at $140 per user,
and Facebook is at $123. Even at its latest $2 billion valuation, Snapchat
trades at $50 per user. (And Snapchat reportedly turned down a $3 billion offer
from Facebook last year.)
"We don't think the company overpaid for WhatsApp,"
said Peck. "We think WhatsApp and Facebook were likely to more closely
resemble each other over time, potentially creating noteworthy competition,
which can now be avoided."
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